Eldorado Gold's (TSE:ELD) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Eldorado Gold (TSE:ELD) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Eldorado Gold:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.036 = US$171m ÷ (US$5.0b - US$274m) (Based on the trailing twelve months to December 2023).

So, Eldorado Gold has an ROCE of 3.6%. On its own that's a low return, but compared to the average of 2.0% generated by the Metals and Mining industry, it's much better.

See our latest analysis for Eldorado Gold

In the above chart we have measured Eldorado Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Eldorado Gold .

What Does the ROCE Trend For Eldorado Gold Tell Us?

Eldorado Gold has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 3.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Eldorado Gold has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

What We Can Learn From Eldorado Gold's ROCE

In summary, we're delighted to see that Eldorado Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 169% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Eldorado Gold can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Eldorado Gold that we think you should be aware of.

While Eldorado Gold isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.